Total cannabis tax revenue for the state has dropped 11% to $237.4 million in the first quarter. The double-digit drop shows an ongoing downward trend in all categories, prompting operators to pivot to other businesses or activities.

This includes the founding mother of dispensaries, CBC Marin Alliance’s Lynnette Shaw, who opened a general store in her hometown of Fairfax on June 1.

The Shaw General Store on Bolinas Road carries merchandise ranging from flip-flops and beach towels to fishing licenses and jellybeans, Shaw said. The 1,200-square-foot structure was once home to a Sherman’s, a jewelry and dress shop, and served as a location for psychic consultations.

Shaw intends to supplement diminishing profits from her nearly three decades of running the School Street cannabis dispensary, the first in the state since the 1996 Compassionate Use Act paved the way for legal medicinal cannabis.

“(The dispensary) now makes a 1% profit margin at best. At least it can (almost) function as a charity. I’m barely making it,” Shaw said. “I tell people they shouldn’t get in the pot business at this time. Half the pot licenses have been given up.” A claim supported by the California Cannabis Operators Association and industry groups.

In the last few years, half the growers have fallowed their properties because their operations have become too costly to run.

That’s why the state eliminated the cultivation tax in 2022, providing relief to struggling growers competing against the illicit market. The excise tax collected at point of sale is now 15%, reduced from 19%.

But that tax rate is due to rise 4% as of July 1, unless the California Legislature intervenes. Assemblyman Matt Haney, D-San Francisco, has authored Assembly Bill 564 designed to freeze the excise tax. It passed 74-0 in the Assembly and is up for review by the Senate.

Excise tax revenue — a per-unit rate —was also down to $140.6 million, according to the California Department of Fee Administration, the agency that tracks the revenue. Also collected at retail cash registers, sales tax revenue plummeted to $96.7 million. That’s $13 million less than sales tax revenue of the first quarter 2024.

“This is a full-blown warning sign, not a seasonal low. Operators are saying they can’t compete with high taxes. The situation is dire. Retailers are dropping prices in order to compete,” said Amy O’Gorman Jenkins, a state lobbyist and executive director of the California Cannabis Operator Association.

Shaw and Solful CEO Eli Melrod said some customers either complain or “walk out” when their products are rung up.

“They’ve got to lower these taxes. Right now, we’re fighting tooth and nail,” Melrod said. Diversifying locations in other cities helps, he added. Solful has recently expanded from its flagship Sebastopol headquarters to Healdsburg. A Petaluma store is on the way.

“I think the industry is still hopeful,” Melrod said.

He explained the industry needs to make the case that reducing the tax rate could lead to the state collecting more in revenue under the theory that cannabis customers will avoid illegal businesses if taxes are less.

“We’re well passed a warning sign,” said Tiffany Devitt, governmental affairs chief for CannaCraft, a Santa Rosa producer.

She cited taxable sales at a 5-year low from 2021’s $1.6 billion.

Taxable sales — which measures total cash receipts —dipped to $1 billion, from $1.2 billion recorded in 2024 for the first and fourth quarters.

State tax receipts show 15 consecutive quarters of declining revenue.

“It was a warning sign 12 quarters ago. This is an industry imploding,” DeVitt said.

According to the Vangst jobs report, California lost more than 12,000 total cannabis jobs in 2023 and another 5,000 a year later.

By category, over 100 growers have either surrendered their license or allowed it to expire, she mentioned. Meanwhile, a fifth of retailers “have disappeared,” she added.

“We’ve gotten to the point where more (state) cannabis businesses are inactive than active,” Devitt said, adding other states have a better situation. “Michigan has a third of our rate. We need to cut taxes in half. Right now, we’re in survival mode.”

Since cannabis became legal for recreational use, with a tax structure enacted in January 2018, the state has collected over $7 billion in tax revenue.